ICF Aviation Update

Transcript

Carlos Ozores:Argentina is one of the most underserved, say, middle-income countries in the world. If you look at their GDP per capita, it's very similar to neighbor Chile, for instance, and yet you have— I don't have it off the top of my head, but the travel propensity in Argentina is less than half of what it is in Chile. So that means that If, you know, all else being equal, more people should be traveling. We've done analyses that we think between 2 and 3 times the current level of traffic in Argentina without really anything other than just deregulating the industry. The issue that you've had is that for many years with the previous government, you had policies that restricted airline supply by having on the domestic market, you had minimum and upper fare bans. So that prevented airlines from truly deploying revenue management, offering more expensive fares to capture people who are willing to pay But when airlines are able to charge more, they're also able to charge much less, and so you're able to capture a much larger part of the market. So in Argentina, it's remarkable. You have— I think you have about 50 or 60 million bus passengers that are traveling long distance. These are trips between 6 and 18 hours. They're just used to going from Buenos Aires to Mendoza, Buenos Aires to Córdoba. These are overnight trips. Yeah. These are routes that should be flown, that should be flown. And so we think that with this government, the Macri government, the first thing that they've done is to eliminate the upper fare band. So that allows airlines to have much more upward flexibility in pricing. The other thing they've done is to allow to issue licenses for new airlines. So you've had Avianca come in. This is the Synergy, the owners of Avianca, the Synergy Group, have bought an airline in Argentina from, actually from the president, Macri. Right. So they've launched, you have this year you have Flybondi that launched. Flybondi is backed by serious investors, you know, they had $75 million of startup funding by Cartesian as the main fund, but then you also have Michael Crawley and Michael Powell from Ryanair and from Wizz Air behind them. So these are, you know, these are serious people looking at this market. We think that the entry of new players is going to really help to catapult that traffic 2 or 3 times. We estimate that within the next 6 to 7 years you should see a doubling or tripling of the market. Now I would just say this all depends though, you know, obviously the market is there. What they need though is for the government to accompany this process by continuing to reduce the barriers to business. They still need to remove the lower fare band, which is going to allow airlines to truly implement the low-cost pricing. I'm talking about the You know, the $1 fare, the $5 fare, that today is not possible. That's a big part of getting people to try travel for the first time. You need to deregulate, you know, the ground handling market. You need to really lower some of the costs, reduce fuel pricing. So all these things need to accompany to truly have a thriving domestic aviation industry. So right now the wave that we're seeing in the region is the JVs. So there's already a lot of talk of JVs. You have, for instance, between LATAM and American Airlines, LATAM and IAG. They all have sort of— they pretty much have the JVs in place on paper. They're just waiting for final approval. So for example, the Brazilian Senate about a month ago finally approved the open skies with the United States. Now it's waiting for the president's approval, and there's a very strong expectation that the president will sign because the party that promoted this initiative in Congress is aligned with the president. So So then that needs to go to the US DOT. So as we— I think the first wave of consolidation is going to be through these JVs. It's going to allow, on one end, sort of LATAM and American to work more closely together. I think we're going to see— there's already talk of United and Avianca, so it's natural that you're going to see a closer relationship between those carriers. And then you have Delta that has equity investments in Aeromexico and in GOL. So I think it's the natural course of things, and it's the way in which these airlines can strengthen their positions and be better positioned to compete against the low costs, which are also coming into their home markets. If we look at Mexico, Mexico is a mature market for LCCs. The government issued licenses for LCCs back in 2005, which is more or less when Volaris, Interjet, which we'll put into this LCC category, more like a hybrid, and Viva started flying. Today, these carriers combined have about something like 60-65% of the market, which is probably the highest level of LCC penetration anywhere in the world. So I would say, you know, by all means, LCCs have really probably exceeded expectations in Mexico. Where else do we have LCCs in Latin America? You have Colombia. In Colombia, Viva Colombia started in about 2012. Today they have about a 12% market share. I think they're— in terms of their presence in the market, it's acceptable. Is it where they would have liked it to have been? You know, I think they may not have reached their full expectations yet, but I think, you know, it's an airline that's here for the long term. In fact, the Aerolandia Group bought out the Mexican investors, so now they're the sole owners of this business. Declan Ryan is down there running the airline with the intention of truly solidifying and growing its position. They've recently expanded into Peru. They're looking at flying, setting up a base in Ecuador. So, you know, if you ask me, I think that maybe they expected a bit more, but they're in a good position. JetSmart in Chile, it's very recent, so it's difficult to really appreciate, but I don't know what market share they have. From what I understand, they're very satisfied with their recent performance. Fly Bondi is too soon to tell, but I think so on the whole, I think they're doing reasonably well. So if we think about the large economies, the large air travel markets. I think without question the most progressive is Chile. From the very beginning, Chile realized that they're a country that's in extreme south of the continent, so they're far from everything. They're never really going to be a hub the way a Panama City is or a Dubai. And being far and being an exporter of products like salmon, fresh fruit, so they realized we need connectivity. And so they took an approach, a very progressive approach, to use your term, And from the very beginning, they've had universal open skies policies with any country that's willing to reciprocate. They don't have any restrictions on foreign ownership. They don't require crews to be Chilean nationals. They also don't have any restrictions on cabotage. So a foreign airline can fly domestic segments in Chile. So, and we see the benefits of this. You know, it's been a flourishing market for aviation. which hasn't prevented LATAM, which is a national, you know, started off as a national carrier, from also thriving. So I think Chile goes to show that you can be very flexible and still support a successful airline business. This has also led to the entry of JetSmart and carriers like Sky that are turning around their business to become more LCC, but they're doing well. I'd say another one that gets a lot of attention in the region is Panama. Panama is, well, as you know, it's the base for Copa Airlines, which is probably the most remarkable success story in Latin American aviation and one of the world's most successful airlines in terms of profitability, in terms of operational reliability. They fly to something like 75 destinations on the continent. So, and this is all thanks also to, in one part, Panama's fantastic geographic location, but also to policies that have allowed Copa to fly anywhere. Panama does have foreign ownership restrictions, But they don't limit or restrict the nationality of crews. So if you fly on Copa, you're going to have crews from all over the world. And this is what— thanks to these government policies that the airline has been able to achieve what it has. So those are 2 good examples. I think if we look at some of the negative examples, I would say Argentina was for a long time an example of a very regressive country with a highly regulated industry, and that's why the market, especially the domestic market, has been— domestic and international markets have been suppressed. But now, with the current Macri government, we've seen a 180-degree change in the outlook. And I've been in this industry for 15 years, I've been to numerous conferences in the region, I have never seen a government team that is as committed to the success of aviation and that is working in such a coordinated fashion as Argentina is today. So I think that Argentina will very soon, if things continue as they are, as they intend to, will be in the list of very progressive nations. But, you know, they still have, you know, very high taxes on aviation when it's airports, fuel. They still have some fare regulations. They still have restrictions on route rights. And then the international markets are still limited by bilaterals. Right. Some very much so. Like until not too long ago, between Colombia and Argentina, you had— the bilateral allowed 4 weekly frequencies. So it's 4 flights per week for each country. You compare that to Panama, I think Copa has maybe 5 daily flights into Buenos Aires alone. So Argentina has a way to go to really open up, and we're going to see the benefits of this. And then the other sort of major market that is still, you know, needs to come a long way without question is Brazil. You know, Brazil has the world's, I think, most expensive or second most expensive jet fuel for domestic flights. Even though Brazil produces most of its jet fuel nationally, they price all of this fuel as if it was imported, and then they apply very high levies and state taxes of up to 25% on domestic jet fuel. So this makes— Why? Well, that's why you don't have any LCCs in Brazil. This makes the cost of flying a domestic flight very, very prohibitive. You know, they've deregulated fares, they've deregulated the domestic route rights, so in that sense you have progress. Last year they started allowing airlines for the first time to actually charge for ancillaries, so charging for bags, which before then was considered a fundamental sort of passenger right. And then the last thing in Brazil, last year you also had important labour reforms that allows airlines to have more flexibility with their staffing. Okay. So all these things are moving the supply curve to the right and allowing airlines to be, you know, much more efficient, to reduce pricing. But I would still consider Brazil a fairly complex and difficult place for airlines to do business.

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